What is the money purchase annual allowance (MPAA)?

The money purchase annual allowance (MPAA) typically kicks in after you have made your first taxable withdrawal from a defined contribution pension.

Read on to find out more about what the MPAA is, when it’s activated and why you need to know about it before you start taking money out of your pension.

What is the money purchase annual allowance?

The MPAA is a lower allowance for pension contributions that may kick once you’ve started taking money out of your pension(s).

Everyone has an annual allowance, which is a limit on the amount of money you can pay into your pension and get tax relief on your contributions.

The annual allowance for the 2024/25 tax year is 100% of your earnings, up to a maximum of £60,000. However, once you have made a withdrawal from your pension, this allowance may be replaced by the lower MPAA.

The MPAA is £10,000 for the 2024/25 tax year.

The idea behind the MPAA is that it limits savers’ ability to get tax relief on pension contributions twice - by withdrawing pension savings only to pay that money straight back into their retirement pot.

How does the money purchase annual allowance work?

The MPAA is applied in different ways, depending on the tax year.

In the first tax year in which you draw your pension, MPAA is applied only to contributions you make into your pension pot after the date it has been triggered.

After that, all contributions will be covered by the MPAA in every tax year.

Here’s an example of how it works (in the 2024/25 tax year):

• Jill pays a monthly contribution of £1,000 into her pension on the first of each month.
• On 1 November 2024, Jill takes a taxable lump sum called an uncrystallised funds pension lump sum (UFPLS) from her pension. This is the ‘trigger event’ that causes the MPAA to kick in.
• All the contributions Jill has paid up to November are measured against her standard annual allowance of £60,000. These only total £7,000 so she is well within this limit.
• Jill continues to work and pay into her pension. But all the contributions that she pays in after the trigger date are measured against the MPAA of £10,000. If she carries on paying in £1,000 a month until 1 April, she’ll pay in another £5,000 – which will exceed the MPAA.
• Jill now faces an additional tax charge on the excess contribution.

In every year that follows, Jill will exceed the MPAA if she continues to pay in £12,000 a year. 

Jill can consult a financial adviser to discuss whether she may be better off saving her excess income elsewhere.

What are the money purchase annual allowance rules?

It’s important to understand how the MPAA works before you access your pension.

This is because it can significantly reduce the amount of money you can tax-effectively pay into your pension towards the end of your working life.

Here are the key facts at a glance:

• The MPAA reduces the amount you can save into a defined contribution pension and get tax relief from a maximum of £60,000 to £10,000.
• There are many ‘events’ that will trigger the MPAA (see below).
• Your pension scheme is required to notify you once you have triggered the MPAA.
• You no longer use carry forward rules after the MPAA has kicked in.
• Once the MPAA has been triggered, it will remain in force.

However, working out what actions will trigger the MPAA can be confusing.

What will trigger the MPAA?

The MPAA will be triggered when you ‘flexibly access’ your pension. 

This includes the following scenarios:

• You cash in your whole pension and take the money as a lump sum.
• You take a series of taxable lump sums (UFPLS) from your pension.
• You use your pension to set up a drawdown plan and start taking income from it.
• You have a capped drawdown plan (a type of scheme from before April 2015), and exceed the cap on your income.
• You buy a flexible or investment-linked annuity that could see your income go down.

What won’t trigger the MPAA?

There are some occasions where a pension withdrawal won’t trigger the MPAA.

For example:

• You take a tax-free lump sum and buy a lifetime annuity that gives you a guaranteed minimum income.
• You take a tax-free lump sum from your pension pot and set up a drawdown scheme but don’t yet take any income from the drawdown scheme.
• You may be able to cash in pension pots with a value of less than £10,000.

Finally, the MPAA only applies to contributions that you make to defined contribution pensions, not to defined benefit pension schemes.

What are the fines for not complying with the money purchase annual allowance?

If you trigger the MPAA, your scheme administrator will let you know.

However, it’s your responsibility to provide relevant information about the situation to any other pension provider with whom you are saving within 91 days.

If you fail to follow these rules, you could be liable for a £300 fine, followed by daily extra penalties of £60 if the situation remains unresolved.

It's worth talking to a qualified financial adviser about the potential pitfalls of failing to comply with the MPAA.

They will be able to help you steer clear of unwelcome fines.

How can a financial adviser or accountant help?

The MPAA has created a complicated environment where it’s all too easy to face an unexpected tax liability or even a fine.

As retirement patterns and future plans change, it’s important to be fully aware of the rules, regulations, and evolving schemes that affect your pension status, flexibility and future health.

To navigate the MPAA successfully and use your pension in a way that suits your lifestyle and status, consult a qualified financial adviser or accountant.

Unbiased can quickly match you with a qualified financial adviser or accountant today.